September 2, 2013

Summary Of The Proposals for Margin on Uncleared OTC Derivatives

After a quick read through, the main points of the BIS IOSCO proposals for margin on uncleared OTC derivatives appear to be:

  • FX spot and forwards are exempt
  • The FX parts of a Currency Swap are exempt
  • Variation Margin to be exchanged with a zero threshold
  • Minimum transfer capped at €500,000
  • Threshold capped at €50m, on a Corporate Group basis
  • Initial margin to be either a schedule based approach (see below) or a statistical approach using 99% confidence (or nervousness), 10 day holding period
    • Each asset class considered separately for IM (but see footnotes 15 and 16 on page 12 which provide exceptions)
    • Each historic scenarios period to  include a period of 'financial stress' which is identified to regulators
    • Historic period capped at 5 years? (why?) (or is the financial stress period?)
    • The scenarios in the financial stress period to be equally weighted
    • Model to be approved by regulators (whether provided in-house, or externally)
    • The total IM across the major asset classes will be the sum of the IM per asset class (much like an Omnibus Gross Account)
    • The proposals make plain that the lack of correlation across asset classes means IM must be siloed per asset class
  • The establishment of eligible collateral rules must involve regulators, including any haircuts applied
  • IM to be paid gross without netting between parties
  • IM to be held in such a way as to make it readily accessible to a non-defaulting party
  • Re-hypothecation allowed, but with a long list of conditions, and if I understand it right, only by providing the assets to "buy-side" firms
    • And only once – the receiver of a rehyped asset cannot themselves rehyp the assets
  • Phasing
    • 1st Dec 2015 VM on new trades must meet these rules, VM on old trades not changed
    • 1st Dec 2015 IM approach applies to new trades, IM on old trades unaffected
    • 1st Dec 2015 to 30th Nov 2016: Any firm with a portfolio over €3trn to exchange IM (measured during June – Aug 2015)
    • 1st Dec 2016 to 30th Nov 2017: Inclusion threshold down to €2.25trn
    • 1st Dec 2017 to 30th Nov 2018: Inclusion threshold down to €1.5trn
    • 1st Dec 2018 to 30th Nov 2019: Inclusion threshold down to €750bn
    • 1st Dec 2019 onwards, inclusion threshold down to €8bn

Firms choosing a schedule based approach to IM will use this schedule:


The BIS proposal is attached below.


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